4 Trading Fears and How to Overcome Them

Frank Kollar of FibTimer.com explains how you can overcome your doubt and fear
and still make solid, profitable trading decisions.

All market timers, traders, and investors in every kind of market feel fear
at some level. Turn on the news one day and hear that a steep, unexpected
selloff is taking place and most of us will get a queasy feeling in our
stomachs.

But the key to successful, profitable market timing—in fact, in all
trading—is in how we prepare ourselves to handle trading fears. How we prepare
to deal with the risks inherent in trading.

Mark Douglas, an expert in trading psychology, says this about trading fears
in his book, Trading in the Zone: "Most investors believe they know
what is going to happen next. This causes traders to put too much weight on the
outcome of the current trade, while not assessing their performance as a
probability game that they are playing over time. This manifests itself in
investors getting in too high and too low and causing them to react emotionally,
with excessive fear or greed after a series of losses or wins."

As the importance of an individual trade increases in the trader's mind, the
fear level tends to increase as well. A trader becomes more hesitant and
cautious, seeking to avoid a mistake. The risk of choking under pressure
increases as the trader feels the pressure build.

All traders have fear, but winning market timers manage their fear, while
losing timers (as well as all traders) are controlled by it. When faced with a
potentially dangerous situation, the instinctive tendency is to revert to the
fight or flight response. We can either prepare to do battle against
the perceived threat or we can flee from this danger.

When an investor interprets a state of arousal negatively as fear or stress,
performance is likely to be impaired. A trader will tend to freeze.

There are four major trading fears. We will discuss them here, as well as how
to handle them.

Fear of LosingThe fear of losing when making a trade
often has several consequences. Fear of loss tends to make a timer hesitant to
execute his or her timing strategy. This can often lead to an inability to pull
the trigger on new entries as well as on new exits.

As a market timer, you know that you need to be decisive in taking action
when your strategy dictates a new entry or exit, so when fear of loss holds you
back from taking action, you also lose confidence in your ability to execute
your timing strategy. This causes a lack of trust in the strategy, or more
importantly, in your own ability to execute future signals.

For example, if you doubt you will actually be able to exit your position
when your strategy tells you to get out, then as a self-preservation mechanism,
you will also choose not to get into a new trade. Thus begins analysis
paralysis, where you are merely looking at new trades but not getting the
proper reinforcement to pull the trigger. In fact, the reinforcement is negative
and actually pulls you away from making a move.

Looking deeper at why a timer cannot pull the trigger, a lack of confidence
causes the timer to believe that by not trading, he is moving away from
potential pain as opposed to moving toward future gain.

No one likes losses, but the reality is, of course, that even the best
professionals will lose. The key is that they will lose much less, which allows
them to remain in the game, both financially and psychologically. The longer you
can remain in the trading game with a sound timing strategy, the more likely you
will start to experience a better run of trades that will take you out of any
temporary trading slumps.

When you're having trouble pulling the trigger, realize that you are worrying
too much about results and are not focused on your execution process.

By following a strategy that unemotionally tells you when to enter and exit
the market, you can avoid the pitfalls caused by fear.

Wealthy traders learned long ago that unemotional (non-discretionary) timing
strategies prevent losses during emotional times in the market. They know the
strategies work, so they put aside their fears and make the trades.

And remember, you must be able to take a loss. Consider them a part of
trading. If you cannot, you will not be around for the big gains because you
will be on the sidelines guarding your capital against that potential loss.

Remember that good timing strategies are designed to guard against big
losses. Every trade you take has the potential to become a loss, so get used to
this reality and take every buy and sell signal. That way, when the next big
trend starts, you will be onboard and profit from it.

Fear of Missing OutEvery trend always has its doubters.
As the trend progresses, skeptics will slowly become converts due to the fear of
missing out on profits or the pain of losses in betting against that trend.

The fear of missing out can also be characterized as greed of sorts, for an
investor is not acting based on some desire to own the stock or mutual fund
other than the fact that it is going up without him onboard.

This fear is often fueled during runaway booms like the technology and
Internet bubble of the late-1990s, as investors heard their friends talking
about newfound riches. The fear of missing out came into play for those who
wanted to experience the same type of euphoria.

When you think about it, this is a very dangerous situation, as at this
stage, investors tend essentially to say, "Get me in at any price; I
must participate in this hot trend!"

The effect of the fear of missing out is a blindness to any potential
downside risk, as it seems clear to the investor that there can only be gains
ahead from such a promising and obviously beneficial trend.
But there's nothing obvious about it.

Remember the stories of the Internet and how it would revolutionize the way
business was done. While the Internet has indeed had a significant impact on our
lives, the hype and frenzy for these stocks ramped up supply of every possible
technology stock that could be brought public and created a situation where the
incredibly high expectations could not possibly be met in reality.

It is expectation gaps like this that often create serious risks for those
who have piled into a trend late and well after it has been widely broadcast in
the media to all investors.

It is not the timing strategies that keep timers from being profitable; it is
the fears-which we all have at one time or another-that keep us from making the
trades.

Fear of Letting a Profit Turn Into a LossUnfortunately,
most market timers (and traders) do the opposite of "let your profits run and
cut your losses short." Instead, they take quick profits while letting losers
get out of control.

Why would a timer do this? Too many traders tend to equate their net worth
with their self-worth. They want to lock in a quick profit to guarantee that
they feel like a winner.

How should you take profits? At FibTimer, we trade trends. Once a trend
begins, we stay with that trade until we have enough evidence that the trend has
reversed. Only then do we exit the position. This could be days if the trend
signal fails or months if it is a successful trend.

Does this sometimes result in small losses? Yes. If we have a false signal to
start with, it can. But we must look at market history to understand this
trading concept. History tells us that while there are times when the markets
trade sideways or make failed moves, once a real trend begins, it usually lasts
much longer than anyone expects.

That means for the few failed trends, the real ones last a very long time and
generate huge profits. But because no one knows ahead of time which signal is
the start of the next big trend, we must trade them all.

What happens in the short-term can be accepted because we are assured of
profits in the long-term as long as we stay with our timing strategy. We do not
try to quickly lock in profits. We stay with the trend until the trend
changes.

This way we obtain every bit of profit that the markets will give us. And we
do not have to worry about locking in gains. We let the markets themselves tell
us when to do it.

Fear of Not Being Right Too many market timers care too
much about being proven right in their analysis on each trade, as opposed to
looking at timing as a probability game in which they will be both right and
wrong on individual trades.

In other words, by following the timing strategy, we create positive results
over time.

The desire to focus on being right instead of making money is a function of
the individual's ego, and to be successful, you must trade without ego at all
costs.

Ego leads to equating the timer's net worth with his self-worth, which
results in the desire to take winners too quickly and sit on losers in
often-misguided hopes of exiting at breakeven.

Timing results are often a mirror for where you are in your life. If you feel
any sort of conflict internally with making money or feel the need to be perfect
in everything you do, you will not be able to stay with the timing strategy, but
instead will allow your emotions to step into the timing process.

The ego's need to protect its version of the self must be let go in order to
rid ourselves of the potential for self-sabotage.

If you have a perfectionist mentality when trading, you are really setting
yourself up for failure because it is a given that you will experience losses
along the way in timing, as in any trading.

You can't be a perfectionist and expect to be a great market timer. If you
cannot take a loss when it is small because of the need to be perfect, then the
loss will often times grow to a much larger loss, causing further pain.

The objective should be excellence in timing, not perfection. You should
strive for excellence over a sustained period, as opposed to judging that each
buy or sell signal must be perfect.

The great timers make losing trades, but they are able to keep the impact of
those losses small.

For the market timer who is dealing with excessive ego challenges, this is
one of the strongest arguments for mechanical systems. With mechanical systems,
you grade yourself not on whether your trade analysis was right or wrong.
Instead, you judge yourself based on how effectively you execute your system's
entry and exit signals.

Mechanical systems are all that we use at FibTimer. Years of trading
experience has taught us that there is no way to keep emotions from affecting
trading, except by following unemotional, non-discretionary strategies.

ConclusionAs a market timer, you must move from a
fearful mindset to a mental state of confidence. You have to believe in your
ability to execute every trade, regardless of the current market sentiment
(which is often at odds with the trade).

Knowing that the timing strategy you are following will be profitable over
time builds the confidence needed to take all of the trades. It also makes it
easier to continue to execute new trades after a string of small losing
ones.

Psychologically, this is the critical point where many individuals will pull
the plug, because they are too reactive to emotions as opposed to the
longer-term mechanics of their timing strategy.

And typically, when traders pull the plug and exit their strategy, it is
exactly at that time that the next profitable trend begins.

Too many investors have an "all-or-nothing" mentality. They're either going
to get rich quick or blow out trying. You want to take the opposite mentality:
one that signals that you are in this for the long haul.

As you focus on the execution of your timing strategy, while managing fear,
you realize that giving up is the only way you can truly lose. You will win as
you conquer the four major fears, gain confidence in your timing strategy, and
over time, become a successful (profitable) market timer.